I get stuck on this topic in my head constantly. The wealthiest investor that I know personally has about 400 properties free and clear all cash flow properties C-D class with rents around $800 with market rent being $1200-$1300. These houses are worth $80k-$100k. His cash flow is around $300,000 per month net. However, these properties are all older properties that need tons of repairs and the equity growth is very very slow. The cash flow is insane but no growth. I know tons of investors with 10-20 properties with good cash flow and good equity, but they still will never get anywhere near the person with all the cash flow houses. Me and my wife go back-and-forth on investing for equity or cash flow. Cash flow is definitely the most important thing to us right now, but we know in the future equity will be very important to us as well.
Isn’t it interesting how you said you know in the future, equity will be important. In a way, you’re answering your own question that you need to invest now for the future or the future just gets further and further away. All the best.
I invest for legacy. Your kids will likely sell those properties as tenants in low income properties are headaches. For example I have 4 singles homes (one in A- and 3 in B+ neighborhoods) all paid off net worth 725k cash flow $7150/ months (but at market price it will be $7,700). Zero headache, great tenants all families. But when I started in real estate, I invested in class C neighborhoods. gosh! They were paying the rent but they were also shooting fighting etc… never again
I always get excited when I see Erion as your guest. You have my favorite show on RU-vid. Thank you for your efforts and insight. I appreciate it more that you can think
My plan has been to stack cash flow for the purpose of getting time freedom and getting out of my job . I did not want to wait 10-15 years for my properties to go up in value to get time freedom . Then as Ive a point that I can satisfy my wants and needs with cash flow now I’m mixing in a set of properties that have more appreciation upside . I don’t see it as an either or situation . Cash flow first , then assets that get appreciation and cash flow ,then in the longterm I may get some that are nearly all appreciation upside .
Point well taken. I think you can do both. I did this as well. I just _accidently_ found - like Erion did - that the growth of my rentals, both of rent and of value, got me to my goals faster. The rent growth is undervalued. You don't have to sell properties to benefit from that, but lower-end "cash flow" properties don't always have rents that grow as fast as others in high demand areas.
I'm glad I watched this video. Gave me a lot to think about. From the beginning I've been searching for cash flow properties but I really like how everything was explained about the majority of the wealth is made from the appreciation and about buying quality properties in great locations that have population and job growth. I'm currently 32 years old with 49 multi-family units in the Phoenix Metro of Arizona. And I've passed on some deals simply because the cash flow didn't hit my buy box criteria and when I look back those properties were in better areas such as Scottsdale, Tempe and certain ZIP codes in Mesa. Those properties in those areas have appreciated much more and their rents have gone up more as well. So it's very true better locations and Better Properties May cost more but over the long term they typically will go up in value more and the rents will go up more and you'll be able to attract higher quality tenants
thanks for adding your own experienced. And congrats on your success building a portfolio! I started with the cheaper, cash-flow heavy properties. But I've tried to gravitate toward a balance of cash flow and quality/growth as I've matured. And it's making my life easier and building more wealth.
I may be way too early in the video to comment (7min) and you might cover this exact point, but before I lose my train of thought, I wanted to mention "age" of the investor as a key factor. In my case, I'm 70, and way late to this game so my focus is immediate cash flow. My children, on the other hand, will be able to sell my properties for the equity if they choose. Obviously they could keep the properties and benefit from the cash flow, but if they chose to sell, they would immediately benefit from the equity which literally cost them nothing, especially with the stepped up basis for taxes. Point being, and as Coach always says, it depends on the individual's situation/goals as to which is the best way to invest. And, just to be clear, I am not saying that older investors should not invest for growth.
Great episode for a new investor investing in 2 airbnbs for cash flow. Makes me want to make sure I keep the condo I live in now for the future appreciation! Keep up the great work! 100K is around the corner‼️ CONGRATS👏🎉
Coach...I discovered your channel a day or two ago and this is the 2nd video of yours that I've watched. I agree completely that lower cash flow is going to result in higher growth. The challenge for newbies, of course, is to avoid ending up in a situation where they (me) can't afford to cover the negative cash flows that seem to be a part of so many growing markets. I've heard you have about 100 doors? What did you do in the beginning of your investing career, and how has that changed over time? If you have a video(s) that explains this, please just reply with the links. Thanks!
Great video coach as always, specially those with Erion! Very educational conversations! Saludos from México! PS I already finished your book the small and mighty real estate investor, best book I’ve read in real estate subject
I think I will not ever buy a property for $300 Cashflow. If I own 10 properties who deliver me ridiculous $3000 per month that's just too much hassle. Also this all depends on your life situation. We started with 2 properties in our mid 50s, we don't have the time to think return of investment or profit, we think of how to get these 2 properties paid off entirely as long as we're able to. So in 2 years these 2 houses will be paid off, (5 years total that's bloody world record) they will give us shy $4000 CAD before taxes, that's still not great but that's maybe the base for something more. $300 cash flow is not why we do this.
We’re the same age. So yeah, we are on the back half as they say. I used to think the same way. But we have apartments. I don’t think of it as properties, I think of it as doors. We average $200 a door cash flow. And so we’re taking the same lingo, that’s bottom line profit. So my 16 unit apartment after mortgage and all expenses is $3200 a month net, 38K year. Remember you still don’t pay tax on that 38K because of course at the end of the year we get the wonderful depreciation write down on this property is 21k for the year. We end up paying almost no income tax on the net profit. To me it depends on the type of rental. I would not want 16 single family homes. The main reason is we self manage. Having 16 at 1 location makes more sense in my world. We have a total of 40 doors with 5 buildings. And 3 of the buildings are next to each other.
That's very cool and just a different approach. We might get into that direction eventually but only when our 2 units are paid. We will never re- mortgage them. Whatever is possible, we will do. There's another aspect: How much money do we want to give our kids when we die vs. When are we ever gonna start enjoying that money even if it's less? 😉
@@jensbiederstaedt8022 Those question are dependent on your age. If you’re 30, well another 30 years is a lot of time. If you’re in your 50’s like me then it’s a different game. If you don’t need the cash flow and interest rates are higher (above 6%) I would pay down principal fast. But if not maybe a refi cash out buy another duplex or a quad. It just depends on what you’re trying to accomplish. With 40 doors, and a we own a restaurant and we “manage” both. And we do all our own repairs and improvements, well we are busy. Really busy. BUT this is our job. We don’t work a W2 job anywhere. I wouldn’t change anything.
Another benefit of having an apartment building is the ability to forced the appreciation. As the net operating income increases, so does the value of the property. Only can be done on 5 units or more.
I had my own aha in a spreadsheet when I attempted to understand the IRR calculation. While I didn't need to know exactly how IRR was calculated, I wanted to have an intuitive feeling of IRR. After modeling different kinds of properties (high cash flow, high appreciation, hybrid etc) it became obvious that a reasonable number to substitute for IRR was the rate of appreciation which supports Erion's 80/20 rule, or to be honest even more like 90/10 or more.
For his 10 year example, I wonder if he considered that the cash flow is continually accessible and can be invested through those 10 years to earn more
Hey Mark - excellent point about the reinvestment of cashflows. We tried to keep this discussion at a 10k ft level without getting into the details. But if we get into the ability to reinvest, same point can be made about tapping the equity that's been building up through a cash-out refinance and reinvesting that into more properties. If you think about it, that's even more favorable since cash-out refinance proceeds are not taxable while the cashflow over and above depreciation is.
Hi, Coach. My 2 cents worth is that the areas with the most equity growth also have the fastest growth of rent (ie cashflow). So, if you are a bit more patient, you end up with both: more equity and more cashflow over time. Feels similar to the argument between a high yield ETF where the cashflow is high but the underlying value doesn't really increase vs and ETF that pays a much smaller dividend, but the dividend is growing at a faster clip and the underlying value of the shares is also increasing. Given a bit more time, I think picking the growth is a better play unless you are needing the cashflow soon (full disclosure...I live in the Phoenix area so that growth has the downside of now being a hard place to buy at the moment due to price so cost of entry may make the decision for you anyway...)
I have found this same thing to be true. One of my best cash flow rentals NOW started in 2009 as a poor cash flow property. But I bought the great location, paid full price, but have benefited since then as rents grew consistently and my mortgage stayed fixed.
What a strong argument for appreciation rentals. Would you keep a property in San Diego where my mortgage is 4000 and rent is 3300. It’s in a great area but will be under $700. But easily will get 5-6% growth
It's a tough call. I'm not a fan of negative cash flow because it's hard to sustain if things were to get bad in the rest of your financial life. But if you have deeper pockets or if you can partner with someone with deeper pockets, it could still make sense. It also depends on how good of a loan (low-interest, fixed for long-term) you have. The better the loan, the more I'm willing to subsidize a little up front until the growth catches up.
@@CoachChadCarson Thank you! Appreciate your thoughts. I have a 3.6% fixed for 30 years. Also a very big tech company is building their headquarters 5 miles away.
How old is the house in San Diego? Have you had to do a lot of maintenance on it or do you feel like the plumbing electrical ac roof are in pretty good condition? Can you afford a $1000 hit monthly
Erion is a great guest, and I hope you bring him on more. As a person whose end game is lean FIRE to do more entrepreneurial things, it's hard for me to understand the end game going the appreciation route. I live in an appreciation market, and I'm completely fine with waiting 10 years to have a cash-flowing portfolio. Does one eventually just buy cash flow properties with properties that have appreciated? It sounds like you can go faster with the appreciation route. However, Erion and you even said that cash flow gets eaten away year after year. It would be great if you showed some case studies on what the end game looks like in an appreciation strategy that gets you lean FIRE money. I have no intentions of sitting on the beach but would like to have some basic expenses covered to start my own business. I suspect there are a lot of people who follow you that are in the same boat. They are willing to play the long game but maybe can't see how the end goal would actually look. Thanks for all you do.
Great feedback, Benjamin! Thank you. I will try to answer this more in future videos and with case studies because you're right - a lot of people what to understand the mechanics of this. I have a video coming on August 19th called "How to Become Financially Free With 5 Small Rental Properties" that's going to discuss this exact thing. And in my book The Small and Mighty Investor I have several chapters on the stage of Harvester/Ender where I explain different ways to accomplish this cash flow with your rentals. One is selling growth rentals to buy cash flow rentals. Another is doing rental debt snowballs to pay off debt. Another is buying more rentals than you need and selling the excess to pay off the others. Read those chapters for more details on each strategy.
But what if cash flow is a priority in the beginning to build more capital? And then you can be a little choosier to look for those properties in growth areas.
That's true. Many investors start with cash flow properties for this reason. But I've become convinced it's not the only way. Another way is partnering with investors who have deeper pockets to buy those quality properties from the start. Buy a good enough deal so they put up all the capital and you find and manage the deal. You can get 50% of a quality deal without any of your own money. And by splitting the cash flow, you'll get paid to manage these deals, too. Here are 2 of my recent videos discussing this strategy: - ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-D1QMVz2EQ9E.html - ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-6_0quxsP7Ms.html
It just not capital appreciation, you can also charge much higher rent over time whereas the price you paid on the property and mortgage are fixed and achieve a good cash-flow in the long run on high quality properties. Avoid buying poor quality properties that looks good on a cash-flow basis, they usually comes with headaches.
How many 2008’s we had, as younger investors to get a shot at 80k and 20% CoC? Numbers are skewed, cash flow over everything! Class A always go down first as we see now, And why would anyone ever sell their properties???
Loving this breakdown! Cash flow versus growth is a classic dilemma. I've been experimenting with ways to blend these approaches, especially with emerging options like crypto IRAs through My Digital Money. They promise unique benefits for long-term wealth accumulation. Curious if anyone has thoughts or experiences to share on integrating crypto into their investment mix?
I bough a condo in 2005 for $163k its been renting all the time. Now is worth $275k. How much would I keep if I sale considering 10 percent sale cost, Twenty years of depreciation recapture tax, and capital gains. I believe I can keep like $80k unless I 1031 exchange.
I was thinking this same thing a few months ago. But, I’m still new to REÍ and didn’t trust my instincts or math and thought I must be missing something (I’ve heard cash flow is everything for so long). When you calculate 3% appreciation on the median home, you’ll never get that in cash flow unless you’re making a massive down payment.
Agree with Hawk2phreak. Cash flow is still important, but it's just not your only or main driver to build wealth (at least at first). Thanks for watching and commenting!
@@CoachChadCarson Just to be clear, I never said cash flow wasn't important. My point was that capital appreciation is almost always going to outpace cash flow. Like Erion said, choose where you focus. I'll still continue to focus on buying cash flowing assets, but appreciation will be my main focus.
Why wouldn’t 3 percent appreciation on four 200k properties make as much profit as 3 percent appreciation on one 800k property? Over 10 years, or one year or any time frame at all?
When the 800k property is doing 3% then the 200k property is probably flat or in the minus. But if your small property grows at the same rate as other bigger properties then it should be equal profit.
Cash flow is just one benefit. -Depreciation. Wait, I get to write off as an expense every year what I paid (minus land)? Seriously? -Real Estate professional status. Wait, I get to use my “paper losses” to offset my wife’s W2 taxes? Seriously? -Solo self directed 401K. Wait. I can put 70K in a year in that? Then I can use that to acquire more property. Listen everyone. That’s just a few big points. Ask yourself this… Trump LEGALLY paid very little Fed income taxes. How? Biden…LOVES S-Corps. Why? Don’t listen to what rich people do, WATCH what they do.
This may not be best source, but I've been looking at this one lately: www.macrotrends.net/global-metrics/cities/22954/charlotte/population#:~:text=The%20current%20metro%20area%20population,a%203.38%25%20increase%20from%202021.
Dangerous game to play, Appreciation vs Cash Flow. Coming as an analyst of businesses and investment property, mistiming of revenues and expenses cause profitable ventures to file bankruptcy. Example, If you have a property that does not cash flow, I would guess you are also not saving for Cap X expenses or vacancy. When those things occur, there is an oh crap moment. Either you can get it done, or you are scrambling to sell at diminished value. Cash flow protects the investment, reserves maintain the investment value. Mistiming of revenues and expenses sink many investors. Some can do it, but a dangerous game to play with little margin for error. Using your example, expenses on that property can go up to and you are already underwater.
We didn't say anything about buying properties that don't cash flow. If a property doesn't have positive cssh flow, including capex reserves, i won't buy it. The main point we are trying to make it understand where your long term returns actually come from on a leveraged rental. In my experiencing analyzing many properties with investors, they overweigh the role cash flow will play and choose sub par properties as a result.
@@CoachChadCarson I agree with not buying a property with no cash flow. The video to me was a little confusing. I personally have used my cash flow from the initial 4 plex to acquire 6 more rental units (One Triplex, 3 Houses) over the last three years. Now all the properties are creating more cash flow to grow more. I don't need the cash flow at this time, so I am using it to acquire more. Wish you all the best and enjoy your books.
@@CoachChadCarson I agree with not buying a property with no cash flow. The video to me was a little confusing. I personally have used my cash flow from the initial 4 plex to acquire 6 more rental units (One Triplex, 3 Houses) over the last three years. Now all the properties are creating more cash flow to grow more. I don't need the cash flow at this time, so I am using it to acquire more. Wish you all the best and enjoy your books.
